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LABEL DEALS
You will often come across the expression label deal in the record industry.
It is a generic description for a whole range of structures and schemes which
are meant to give Independents and individuals access to the Majors facilities,
while allowing the Independents to sell records in their own name.
Most label deals resemble complicated master licence deals. They set out
how the Independent will make its master recordings, who will provide the
funding and how, and the terms of the licence to the Major. The Majors role
is to manufacture records from the masters delivered by the Independent,
promote them and sell them. The Independent gets a royalty from the Major
for each of its records the Major sells. Thats the theory anyway.
In most label deals, the Independent is responsible for:
contracting with the artists
administering the recording process
delivering the audio and video master recordings to the Major
creating artwork for record covers
making sure the artist is available to support the Majors promotional
activities.
Before considering the mechanics of label deals, it is worthwhile considering
just what labels are, and what label deals are supposed to achieve.
WHAT ARE LABELS?
Record companies sell their records under a variety of so-called labels. The
label itself is a brand: a distinctive name or logo, which can be a trade mark, an
image, or just a name or words. The Majors each use many different labels at
RECORD DISTRIBUTION DEALS 397
any one time. The labels are used to help record buyers tell where a particular
record came from and (perhaps) what kind of music it is, before they have
even heard it. Record companies go to great lengths to protect labels. There is
no point in having a label and promoting it if it can be confused with someone
elses, or if someone else uses it without consent.
Labels can get a reputation for quality or a particular musical style, which
helps marketing. The Blue Note jazz label is a perfect example of a label that
managed to define its musical style so powerfully that the record-buying public
can more or less tell what they will get as soon as they see a Blue Note label
on the record. The label identification is so strong that when the company
decided to release classical recordings, it had to devise another label for those
new recordings.
Labels in other genres of music have been successful in defining themselves
by their labels too. No one would expect Harmonia Mundi to release rock
and roll any more than American Recordings would release chamber music.
Any potential buyer looking at a record on the Verve label would know the
recordings musical genre.
A successful label helps to sell records. Often, they are one of the most
valuable assets an Independent can acquire, besides its master recordings. We
will look at the ways to protect labels later in this chapter.
LABEL OWNERSHIP
You can see the diversity of labels just by browsing the internet or through any
surviving record shop. If you are unsure who owns a particular label or master,
or who is licensed to use it, ARIA keeps a register of the owners and licensees
of many of the labels used in Australia. It is updated annually, to keep track
of label movements between record companies and to note any new labels as
they are introduced. Sometimes old labels are dropped and replaced by new
ones. Sometimes old ones are revived after years of disuse. Informal database
resources like Wikipedia can also be helpful, at least as a first port of call.
If a label has been registered as a trade mark, it is easy to search the trade
mark register on IP Australias website to find who owns (or owned) it. Many,
though, are just used for a while, then fade away. Some are sold off to new
owners, or change hands as companies are sold or merged over the years. This
can make them hard to track down, but may have little adverse effect on the
labels worth as a marketing tool.
WHY DO A LABEL DEAL?
Label deals are usually structured so an Independent can sell records under
its own label. This way, if the recording or artist is successful, the artist is
associated with the label rather than the Major that distributes the records, so
398 RECORD DISTRIBUTION DEALS
the label can acquire a public profile, which attracts other artists who want to
be associated with its success.
Often, the idea behind a label deal (at least in the minds of the people
starting the Independent) is that the label will sign new artists (using a Majors
funds as its bank), have a few successes and eventually sell the company off.
This process has actually been one of the features of the growth of the music
industry over the years. In fact, most of the Majors achieved their accelerated
growth by buying and absorbing other labels. A few examples: the Atlantic
label started as an Independent, distributed by Warner, who eventually bought
it (along with another Independent, Electra) and combined their operations
to form the WEA company. Herb Albert learned (and earned) enough from
his days heading the Tijuana Brass, to form A&M Records with Jerry Moss.
A&M was remarkably successful and was bought eventually by PolyGram.
Robert Stigwoods RSO label made a fortune during the disco-fever phase and
its catalogue was too attractive for PolyGram to ignore. In turn, PolyGram was
snapped up by Universal, one of the worlds biggest Majors.
The Independents are usually the result of the fire in the belly of one
person. For example, David Geffen was manager to many of the big names
of the 1960s, such as Joni Mitchell, Neil Young and Crosby, Stills and Nash.
In 1970 he founded Asylum Records. Asylums roster included the major
names of the 1970s and was eventually sold to Elektra, which was sold to
Warner, creating WEA. Not content with that, in 1980 (presumably when
the non-compete clause in his contract expired), he founded Geffen Records,
which carried Guns N Roses, Elton John, Don Henley, Whitesnake and
Aerosmith. MCA bought Geffen Records in 1989. Geffen then went off to be
a founder of DreamWorks.
The great Australian example of fire in the belly was Michael Gudinski
who founded Mushroom Records (and an octopus of vertically-integrated
entertainment businesses). Mushroom had a label deal with Festival. Over
two decades it amassed a large and important catalogue and was eventually
taken over by Festival (which in turn was bought by Warner Music).
The list of successful labels goes on and on. Unfortunately, the list of
unsuccessful labels is many times longer!
Label deals have been rather unkindly criticised as being a Claytons A&R
policy for Majors, because the Major is relying on the Independent to make
the A&R decisions. Despite the apparent inherent contradiction of a Major
paying someone else to make A&R decisions, most Majors recognise the
value of this kind of deal and continue to do them. By doing a label deal with
an Independent, the Major gets a fully recoupable A&R department. In the
Majors books, the advances that fund the label are advances against the labels
royalties. As the Major will not actually have to pay any royalties until the
RECORD DISTRIBUTION DEALS 399
advances have been recouped in its books, the deal can be quite advantageous
for it, if the label earns good money off its catalogue of recordings.
In addition, the Major can get the wholesale margin (the profit on the sale
to the retailers) when it also distributes the records. Of course, it is still only
profitable if enough records are sold.
NEGOTIATING LABEL DEALS
A label deal has to work at two levels. Before it even gets to the mechanics
of record distribution (royalties, rights, etc.), it has to define the relationship
between the Independent and the Major that will distribute its records.
This is rarely easy, because of the basic conflict between the Independent
wanting to have as little interference as possible from the Major, and the
Major wanting to influence how the Independent spends the funds that the
Major will be providing.
The parties have to spend a lot of time making sure they agree on the
basics of the relationship. This can be strongly influenced by the personalities
of the people involved and this is the great intangible that can make or break a
label deal. If either side has unrealistic expectations, negotiations can be very
difficult. Making promises that cannot be met will almost certainly result in a
fundamentally flawed deal. Experienced advisers, involved from the start, can
do much to minimise these problems.
LABEL IDENTITY
The agreement has to set out the extent of the labels freedom to make A&R
decisions. This will largely depend on how financially independent the label
is and the relationship between the people involved in the label and those in
the Major.
The label should always insist on having the final say as to what records
will be released. Cherry picking by the Major is the alternative a very
unsatisfactory situation for a label, where the Major can decide whether or
not to release any particular recording. If this is the case, the label cannot
give its artists any guarantee that their records will be released. Without a
release guarantee, if the Major says no thanks, the artists and the label will
be in a difficult position. They will have significant recording costs but may
never see the recording released, so cannot earn royalties to recoup them.
The Independent will have to find another way of releasing the record which,
at the very least, will delay any release and may antagonise the artist and put
extreme financial pressure on the Independent.
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FUNDING
The label needs sufficient funds to run its infrastructure and make recordings.
There is no future for the deal if the Major keeps the purse strings so tightly
drawn that the label slowly starves. Good budgets are essential, so the
Independent can make a realistic estimate of its needs.
In most deals, all the funds advanced by the Major will be recoupable
from all royalties payable to the label. This is usually called a cross-recoupable
deal because all royalties, regardless of which of the labels artists earned them,
are retained by the Major until all the advances are recouped. This can lead
to problems if, say, one of the artists has a huge success and starts earning
royalties, but the Major is still retaining all royalties because there are other
advances (for other artists) still to be recouped. This possibility has to be
considered and a mutually acceptable solution worked out before it happens.
(One solution is for the agreement to state that the Major will pay through the
artist royalty to any artist who actually is recouped.)
Sometimes the Major will agree to treat each artist separately. Each artist
has a separate account in the Majors royalty account system and as advances
are paid to the label, they are recorded in the relevant artists account. That
way, the successful artists do not, in effect, subsidise the unsuccessful ones.
This structure only works if a label has a small roster of artists. Once it gets
the size of, say, Interscope or the like, the label can generate enough cash flow
to easily meet its royalty commitments, so it does not need to worry about
cross-recoupment.
As in all record deals, it is vital that the contract spells out exactly when
advances are payable. The Independent needs the money in advance, to pay
recording costs, but the Major will usually want to have the funds payable
on delivery of master tapes, video clips or whatever the funds were spent on.
The usual compromise is half in advance and half on delivery, or progress
payments. Whatever is agreed, the contract must be unambiguous about
when the payments are due and how they are to be paid.
GRANT OF RIGHTS
The rights granted in the master recordings are much the same as in any
master licence, so it is not necessary to repeat them here. Obviously, the
label has to make sure that the rights it gives to the Major do not exceed the
rights it has under its recording contract with the artist. If they do, things can
become extremely tense (e.g. if the artist asks the label why their records were
released as a budget record, or used in an advertisement without the artists
permission, in breach of the artists contract with the label). It is important to
remember that the label really should retain the right to approve any unusual
sales methods or activities that might adversely affect the royalty it receives.
RECORD DISTRIBUTION DEALS 401
REVERSION OF RIGHTS
There are particular things to consider when a label deal comes to the end of
its term. The label naturally wants to be in the position to take its catalogue
and its artists and deal with it without interference from the Major. On the
other hand, the Major will want to ensure that it has a chance to recover its
investment because, from past experience, it expects to be unrecouped at
the end of the term. This is one of the main areas for negotiation when the
deal is being put together. The lawyers job is to find a balance between the
parties wishes.
Most Majors will insist that they keep the exclusive licence of any
recordings for some period after the end of the deal.
For example, say Label A does a three-year deal with Majorco. At the end
of the three-year term, Label A will be free to do a deal with another Major,
but the recordings delivered to Majorco during that time will remain with
Majorco for some additional period. Sometimes it is expressed as a number of
years (often referred to as the retention period or rights period). Sometimes,
it is until recouped.
Unfortunately, this approach creates several problems because:
Majorco will want to keep selling the records in their original
packaging, and will not want to have to remove the label from the
remaining or future stocks of records
the label may not want to have its catalogue split up over two or more
Majors, especially as this may mean some artists will have records
released by two different Majors (which can confuse retailers when
they come to order stocks)
the new Major may want an exclusive right to use the labels, but
Majorco may want to have the right to keep using it.
In spite of the fact that there are lots of examples of labels that have product
split between two distributors (particularly while the first companys retention
period is running out), it is to the labels advantage to find a way to consolidate
its catalogue. This usually means paying back any unrecouped advances, or
paying some percentage of future sales to Majorco. Leave the negotiating and
structuring of this to the lawyers!
TERRITORY
Like any other licence deal, label deals can give Majorco rights for the world,
one country, or anything between. This will be the subject of much negotiation
when the deal is being worked out.
From the labels point of view, the important thing is to achieve releases
in as many countries as possible. If Majorco cannot secure overseas releases
in a reasonable time, the label has to have the right to seek offers elsewhere.
These releases should be under the labels own label, but sometimes overseas
RECORD DISTRIBUTION DEALS 403
licensees will resist this. If this happens, the label has to decide whether this is a
deal-breaking point, or whether to agree and be satisfied with a big production
credit on the record and its packaging and any promotional material.
ROYALTIES
More importantly though, a labels primary source of income is the royalty
from each record sold. Labels do not have the benefit of getting the margin
between the wholesale price and the actual cost of the record, as the Major/
distributor keeps that. This means the only opportunity for the label to make
a profit is to keep the difference between the royalty it receives and the royalty
it pays the artist. Accordingly, labels have to offer lower royalty rates to their
artists than those a Major can afford to offer (assuming, of course, it was ever
willing to pay the maximum).
Also, royalties from overseas sources have to come through yet another
party, which will, of course, take a share for its trouble. With a Major, the
royalties usually go from the local company to the central company, and from
the central company to the Australian company, which distributes it to the
artist. This can delay the royalty accounting for perhaps 18 months or more,
especially if the Major works on half-yearly accounting.
Quarterly accounting will significantly reduce the telescoping of royalty
accounting. Fortunately, most of the Majors use monthly accounting within
their respective inter-company accountings.
AUDIT RIGHTS
Though its something likely to affect only a few artists, it ought to be
remembered that if you are an artist who is contracted to an Independent,
you do not have audit rights that extend to the Majors books of account. You
could certainly audit the labels books, but that is as far as you could go. If you
did an audit and happened to discover a problem, the label (not you) would
have to take the matter up with the Major, which might be a bit unnerving for
the label, seeing the Major is its main source of funds.
ARTISTS AND LABEL DEALS
ADVANTAGES FOR ARTISTS
As an artist signed to an Independent with a label deal, you stand to get
personal attention and (if you are lucky) greater artistic freedom. You can
also benefit from being associated with a successful label, which can boost
your profile. If a label is perceived as being hot then, by association, everyone
signed to them is seen as having the potential to be hot too.
Label deals particularly suit developing artists but the fact is, most
artists who are successful under a label deal will eventually move from
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the Independent label to a Major. After all, Majors generally have bigger
chequebooks, come record contract renegotiation time.
POINTS FOR ARTISTS TO WATCH
If you are an artist signed to an Independent that has a label deal with a
Major, you are affected in several vital ways because the label relies upon the
Major for:
Funding. If the label deal should end, your label could be left without
funds to make your recordings or, in a worst-case scenario, may not
be able to pay your royalties.
Physical manufacture and distribution of the labels recordings. If
there is no deal with a Major, the label may have no facilities for
getting physical records made or distributed.
Funds for promotion and/or use of the Majors promotions staff.
If the label deal should be terminated, there may be no funds to
promote the labels catalogue or artists.
Many policies relating to accounting, retention of royalties to allow
for returned records, and sales policies (all of which have an impact
on your royalties) may not be in the control of the Independent label.
The labels records will be sold under the Majors usual trading terms,
so these terms have to be reflected in the terms of your recording
agreement, which can reduce the labels flexibility in negotiations
with its own artists.
If you are negotiating a record deal with an Independent, which relies upon a
label deal with a Major for its funding/distribution, try to find out everything
you can about the Majors policies, its relationship with the label, the depth of
that relationship, the term of the deal and whether the Major has to release
everything recorded by the label or can cherry pick. Try to meet with the
people in the Major who will be working your product dont just rely on the
say-so of the Independent.
records to retailers and collect payment could do the job, although record
companies are the logical choice because they are already set up to do it.
There are two basic kinds of P&D deal: one is selling and distribution
(where you use the Majors sales force); and the other is distribution-only, and
the Independent does the sell-in to the retailers.
WHY DO P&D DEALS?
Lets assume you own a master recording but need the records made and
distributed. P&D deals give you maximum control over the way the records
are presented and advertised. Once the records are in the warehouse, all
the distributor need do is take orders and ship goods. The distributor has
no financial stake in the goods, no money at risk, and need not have any
involvement in how the goods are promoted, unless it chooses to. As far as
the distributor is concerned, you could be selling carpet slippers for all it
mattered. If you do a P&D deal with a Major, you can get access to the Majors
national distribution network, while remaining essentially independent of
any A&R intrusion.
P&D VERSUS MASTER LICENCE
Under a P&D deal, you own the master recording from which the records are
made and also the records themselves, at least until they are sold to retailers.
In a master licence deal, however, the record company pays for the records
and owns them. This makes the record company worry about the number
pressed, the number sold and any returns. In a P&D deal, the distributor
just keeps the records in the warehouse and ships them out to meet demand
whipped up, no doubt, by your brilliant promotional campaign (which, by the
way, you have to pay for).
Owning the records not only gives you great control over how the records
will be presented and promoted, it also means you can get a greater share of the
total dollars generated from the sale of your records. In a master licence deal,
the record company pays you a royalty of (assuming it was being generous)
around 20% of the retail price, less the usual deductions. By comparison in a
P&D deal the distributor keeps around 20% to 25% (it can vary a bit, especially
if you are a big label, but this is a ball-park figure) of the proceeds of each sale,
and you get the rest.
A word of caution though: P&D deals can be very hungry for capital
funds. (This is dealt with in detail later in this chapter in the section headed
Funding.) In a P&D deal, if your records start to sell really well, you still have
to pay for additional stocks to be manufactured. This may be fine once the
money starts coming in. Meanwhile, unless the distributor is prepared to
make an advance against future sales, you have to find the funds. Fortunately,
if your records start selling really well there is a good chance of flipping the
406 RECORD DISTRIBUTION DEALS
deal over to a licence deal. Then, the distributor will be paying for the stock to
be made and will carry the risk of not selling all of them.
SELECTING A DISTRIBUTOR
You can go via the independent distributors or you can go for one of the Majors
that still offer P&D deals. Some will only do master licence deals. Others will
also give you the option to flip a P&D deal over to a licence deal, should sales
really take off.
You have to shop around. Find out who their main customers are.
The Majors deal with traditional record outlets but tend not to deal with
independent outlets. Independent distributors sometimes do not supply
major retail outlets. You can only find out by asking. Check the Australasian
Music Industry Directory or the Black Book. These directories list distributors
and the labels they distribute. There is no substitute for doing your homework.
Once you have decided which distributors seem the most suitable, see
whether they can or will take the job. This usually involves you convincing
them that you will sell a reasonable number of records. Unless you can sell
more than a minimum number, it is not worth any distributors time to take
on the work. Be realistic, most single artist or single album P&D deals dont
make much money for anyone.
Ask for details of their distribution terms. If you can get it, a copy of
their standard agreement is the best place to start. You can compare terms and
conditions, to see who offers what services and at what cost. Then ask around
retailers, to see if the distributors you have short-listed have a good reputation
for service.
EXPENSES
In P&D deals, the owner gets most of the proceeds from each sale. Up to 70%
75%, depending upon the distribution fee. Before you get excited though,
remember that out of that 80%, you still have to pay:
all risk funding of the entire recording process
the manufacturing cost of physical records and packaging
artwork origination
artists royalties
mechanical copyright royalties
marketing and promotional costs
GST
business overhead, including warehousing of physical stock
(distributors may only be willing to hold the number of records they
feel they need, not the number pressed)
returns and obsolescence of physical stock. The administrative
processing is done by the distributor, but the cost of it (i.e. the loss
RECORD DISTRIBUTION DEALS 407
in a way that will help give a return on them, rather than just having
them dumped at the local tip)
ensuring that the proper GST is paid.
The distributor is responsible for:
including the records in release sheets and putting the titles and
catalogue numbers into the distributors catalogue
fulfilling orders and shipping the records to the retailers
collecting payment
remitting the owners proceeds, after deducting the various costs and
fees.
If the distributor is a Major, it will often arrange for the records to be made for
the owner (unless the owner has already done this, by making arrangements
directly with another manufacturer), although the cost is charged to the owner.
MANUFACTURING PHYSICAL RECORDS
You pay for the records manufactured. If your distributor is a record company
that has its own manufacturing plant, there are obvious benefits in doing a deal
for their plant to make your records. The record company will bill you. You will
have to pay the whole lot within (usually) 30 days, or (if they are generous) the
record company might agree to treat it as an advance against your proceeds
from the sale of those records and deduct it when the accounting is done.
Record companies have usually negotiated very cheap rates with record
manufacturers. As an individual, you are very unlikely to get a comparable
price. If you are using a record company as a distributor, try to get the records
ordered from their usual manufacturer on your behalf. This is likely to reduce
your manufacturing costs considerably.
If you make your own arrangements to have the records manufactured,
you will probably have to pay for the records on delivery. This will drain your
capital rapidly. Remember, a CD can cost you around $3 per unit once you
include the costs of creating and printing artwork, getting the discs made,
having the packaging inserted and the whole lot delivered to your door. You
can negotiate better prices if you are ordering larger quantities but it is always
important to judge carefully whether the savings are real or illusory: if you
can sell the stock readily the savings will be real. If not, the cost of storage,
insurance, handling, interest, and the general inconvenience, make the
ordering process one of keen judgement rather than mere optimism.
It is always worth seeing if the distributor will agree to you deferring
payment of the manufacturing costs until they can be deducted by the
distributor from the proceeds of the sales. This can be done in the course of
their accounting to you.
RECORD DISTRIBUTION DEALS 409
PROMOTIONAL COPIES
It is in your interest to keep tight reign on the number of promotional copies,
including limiting copies that can be ordered by your distributors staff. There
is certainly promotional value in having the record available to the staff, even
if they do not pay for it, but the numbers have to be reasonable. Any records
given away free by the distributor should be exempt from its distribution fee
(or subject to a reduced fee).
You should try to retain sufficient copies to meet promotional needs,
rather than take copies out of the distributors warehouse. This will save you
time and money. Make sure the distributor knows what your promotional
plans are and agree in advance to whom, if anyone, the distributor may provide
promotional copies. Usually, if you are dealing with a Major, they will agree to
simply drop copies off to their main media connections (radio programmers,
DJs and the like) as part of their usual promotions work, provided it does not
require any additional time or effort.
DISTRIBUTION
Most P&D deals give the distributor the exclusive right to distribute in the
nominated territory. This is not a copyright licence, but is still enforceable as a
condition of the contract. If you think you will want to distribute any records
yourself, then reserve that right in the contract. This right can be particularly
useful if you do a lot of live work and can sell records after the show. (Now
quickly read Chapter27, Merchandising!) You might even be able to arrange
some to be sold through mail order or via your website. To do these things, you
need to reserve the rights up-front, or risk annoying your distributor when
your records turn up in unexpected places. Basically, record companies are
good at selling to record retailers. Other non-traditional outlets are outside
their area, so you will have to tackle those yourself. A bit of creative thinking
can generate a surprising number of sales.
Assuming you made your own arrangements for the physical records
and packaging to be manufactured, the distributors work only starts once the
records are delivered to its warehouse. Then, it will load the records catalogue
number into its sales system and put the title into its catalogue. From then on,
the records are available for dealers to order in the same way they would order
any other record. As far as the retailers are concerned, for most purposes
(except returns) there is no difference between records sold by the distributor
under its own labels, and those it is distributing on your behalf.
RECORD DISTRIBUTION DEALS 411
TRADING TERMS
The retailer buys the records in accordance with the distributors trading
terms. These are the rules that regulate the distributors interaction with its
customers (the retailers). The terms of trade determine:
how records are ordered by the retailers
how and when they will be delivered
if and how records may be returned by the retailer
when and how the retailer pays for them.
You have to accept that the distributors trading terms will apply to all its
transactions. You cannot expect them to be changed just for your product.
You have to find out what those terms are, before you do the deal, so you can
make appropriate plans to deal with any parts you might not like.
For example, you should reserve the right to decide when the records can
be discounted, and to know what price theyll be sold for. If you do not, you
could get a very nasty surprise should your records come out at a reduced
(or increased) price. You should also determine whether sales must be firm;
or whether they can be sale or return. You should insist on being advised,
in advance, of any changes to the relevant trading terms. You will also get
an unpleasant surprise if the distributors firm sales policy is changed so that
retailers are permitted to take the stock on spec and then return it at any time
if the stock doesnt sell.
DISTRIBUTION FEES
Like most things in the record industry, the fee the distributor wants in return
for its services is negotiable. It will vary according to your bargaining strength
and the amount of work the distributor will have to do to get its fee. The more
it does, the more it will charge. You have to decide what work is genuinely extra
and what work is routine and effectively not costing the distributor anything it
would not ordinarily spend anyway. Hanging out for a bottom-line fee will be
false economy if this encourages the distributor to put your record even lower
down its list of priorities than it already is.
Most record companies will calculate and pay mechanical copyright
royalties for you at no extra cost. Their system will be processing your record
sales anyway, so its very little extra work to have it calculate the mechanicals
at the end of the quarter and send off a payment on your behalf. Naturally,
the payment will be deducted from any payments due to you from sales of
those records.
Be very wary of distribution fees exceeding 30% of the wholesale price
less GST. This is the top rate for physical distribution, unless the distributor
is handling and paying for advertising. Distribution fees above this may leave
412 RECORD DISTRIBUTION DEALS
you with too little from the proceeds of each sale to cover all your costs, let
alone to make a profit.
Also, be wary of additional handling fees charged as administration fees.
(What do they think you are paying them the distribution fee for? Out of
pity?) Shun delivery fees and the like. The distribution fee is meant to cover
the distributors costs and leave it with a profit. Any added-on fees have to be
questioned. Some may be legitimate but most are just another way of making
a 20% distribution fee add up to a 30% one.
Because the handling and administration of returns is expensive, some
companies will also charge an additional fee for returns. As you will have no
control over returns policy (it is determined by the distributors terms of trade
remember?) you must try to cap this. Others allow a percentage as returns,
but will charge an additional fee per returned record once a certain number
has been reached, usually calculated as a percentage of the number of records
shipped to retailers in that period. Either way, these additional fees can bump
up your distribution costs, so watch out for them and whenever they are
proposed, get them explained to you in full before signing on the dotted line.
DEDUCTIONS AND ACCOUNTING
You must make sure what the actual basis of the payment calculations of net
proceeds will be. The usual basis will be either the retail price after deduction
of GST, or the wholesale price after deduction of GST. Either way, you need
to be sure that there are no other deductions (such as delivery charges or
processing fees) applied before division of the proceeds.
Typically, an accounting from a distributor will show:
Net proceeds from sales
minus mechanical copyright fees (1)
minus distribution fee (2)
minus cost of record (3)
leaves your share (4)
1. This assumes that this will be calculated and paid in accordance
with the Copyright Act and the ARIA/AMCOS Agreement.
2. This will be calculated as a percentage of the net proceeds figure
before deduction of mechanicals or other fees.
3. This will only apply if you have arranged for the record
distributor to do this on your behalf and it has agreed to defer
such payment. Otherwise, you will already have paid for it.
4. Out of this, you will have to meet your artists royalty obligations,
promotional costs and set-up costs. Anything left over is your
profit.
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identification number for each track. There may also be metadata, which is
desirable or necessary for digital distribution.
Most master licences also require the licensor to deliver, at least, an
accurate list of musical works reproduced on the Master as this simplifies the
licensees task of complying with mechanical copyright requirements. The
licensee can use this list when notifying the publishers of the works being
reproduced in the records made from that master.
ADDITIONAL MATERIALS
Records are more than flat pieces of plastic, or a series of 0s and 1s. The
packaging and accompanying artwork and material is an integral part of the
goods being offered to the public. A master licence has to specify:
in what packaging the physical records are to be sold, or what artwork
must accompany the digital version
who will pay for original artwork and production parts to be made
in what form production parts are to be supplied, assuming the
licensor is to supply them (e.g. whether as artwork or as photographic
negatives or digital files)
when the parts must be delivered. (Remember that it usually takes
longer to print packaging than to make the records.)
TERRITORY
This can be as widely or narrowly defined as the parties agree. If you are a
licensor, ensure the definition of the territory is neither ambiguous nor
extends beyond the territory you actually control. If you are a licensee, you
will want the widest possible territory, but your licensor will probably want
the narrowest definition it can negotiate.
Where an Independent (Indie Co) is licensing a master to a Major (Major
Co), and they know Major Cos affiliates are going to release the records
in several territories, it may suit both sides for Major Co to get rights for a
territory greater than its own domestic territory, so it can do the licensing.
Indie Co could choose to negotiate the licence to the affiliate or it could ask
Major Co to act as the licensor because Major Co will probably already have
an inter-company licence agreement in place with its affiliates. In most cases
though, Major Co will only agree to act as licensor if it gets a percentage of the
licence royalty flowing to Indie Co from those external territories.
Conversely, Indie Co might choose to do the additional work of
negotiating the licensing directly, if there are significant financial advantages
(e.g. additional advances) sufficient to outweigh the extra work.
Major Co might only be prepared to sign the licence deal if it is for all
available territories meaning all countries where Indie Co has not yet already
secured releases itself. This is a matter for negotiation. Indie Co needs to make
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No matter what the time of year, the licensor should always deliver the
parts to the licensee in ample time to allow for mishaps, errors and plain old
stupidity. The release date can certainly be adjusted if the records are obviously
not going to be ready in time, but this is not desirable as it may force the
promotions department to spread their time over more records than they can
properly deal with at any one time.
PROMOTION
Licensors will usually want guarantees from licensees that the licensee will
make reasonable (and sometimes, even unreasonable) efforts to promote the
records. Commercial common sense suggests that a licensee would do that
anyway but just to make sure, some licensors insist on a minimum amount
being spent by the licensee on promotional activities. These provisions are
usually difficult to enforce and cannot guarantee a records success anyway.
Most licences oblige the licensee to supply a minimum number of sample
records to the licensor. The proper purpose of these is to verify quality of
manufacture but sometimes the number to be provided can be very significant.
Whatever the number, these copies should be exempt from royalties.
The expression promotional activities can range from a sullen office
junior dropping a copy of the video and a sample record onto a radio
programmers desk, through to the promotions department mounting a co-
ordinated campaign with a street team, posters, place mats, a media party and
a hot air balloon from which the artist dangles, wearing only bicycle shorts
and a smile. The point is, if you have a particular promotional campaign in
mind, and both the licensor and the licensee agree to it, make that a part
of the agreement. This gives the licensor some certainty and protects the
licensee from the allegation (should sales not meet expectations) that it did
not promote the records properly.
Wherever possible, the licensee should be required to keep the licensor
advised of promotional activities as they may be relevant to the licensors own
plans in some way.
Most promotional activities are the licensees responsibility, but some
kinds of promotional work can be so expensive that the licensee has to get
assistance from the licensor. Some promotional activities have an impact on
the royalty rates. For example, television advertising is so expensive that it
is only commercially viable if the retailer pays a premium on the wholesale
price of television advertised records (as they do in the United Kingdom) and/
or the licensor takes a reduction in royalty rate (which is the usual approach
in Australia). The usual reduction is 50%. The tricky part (for your lawyer) is
defining the term television advertised records.
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Most licence agreements include detailed clauses that give the licensor
the right to conduct detailed financial examinations of the licensees books
of account. If you are a licensee, it is in your interest to keep the terms of any
examination as narrow as possible and to ensure that it occurs no later than
two or three years after the end of the Term, in order to give you some finality.
Royalty audits are terribly disruptive affairs and tend to be expensive, which
is why there have been so few between licensors and licensees in Australia. In
the United States, because the market is so big and therefore the amounts of
money in the system are so large, there is a great tradition of licensors auditing
licensees. Perhaps it will catch on here too, if the market does not shrink too
much to make in commercially unfeasible to audit.
Conversely, if you are a licensor, you will of course be deeply suspicious
of the licensee and will try to insist on the right, as part of an audit, to use
an endoscope on the licensees managing director. You will want to insist on
unrestricted access to all the licensees books and records relating to licensing,
promotions and manufacturing but, in practice, a licensee that is administering
a large number of licences will demand some practical limitations on audit
levels so that its own business is not unduly disrupted.
TERMINATION
Licence agreements usually end because the term expires, but sometimes
they end because one of the parties does something to give the other cause to
terminate the agreement for breach of contract. This is when all the lawyers
start turning to the back of the contract to the miscellaneous clauses no one
wanted to look at when the licence agreement was being negotiated.
Well-drafted licence agreements have comprehensive provisions setting
out what events will amount to a breach of the contract and what happens if
a breach occurs.
Most licences give the licensee some days to cure should they make a
mistake, but some events, such as the licensees insolvency, bankruptcy or any
failure to deliver accounting statements on time, will usually give the licensor
the right to terminate the licence immediately. Usually, termination for breach
will also annul any sell-off period.
At the end of any licence deal, the licensee should always be obliged to
destroy manufacturing parts and provide a sworn statement (a certificate of
destruction) verifying that it was done. If there is a sell-off period, then the
licensee may continue to sell remaining stocks at full price. Once the sell-off
period ends, the licensee should have to destroy any remaining stocks and
provide a certificate of destruction. Usually, video masters will be deleted, or
sent to the new licensee.
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MISCELLANEOUS
This is the title usually given to the part of the licence agreement that deals
with such things as which countrys laws should apply when things go
wrong. These clauses can actually be quite important if there is a breach of
the agreement. Most overseas licensors try to make sure their own laws and
courts have sole jurisdiction over the licence agreement and any disputes.
Imagine the problems this could cause for an Australian licensee, if it has to
sue in, say, California, under Californian law! Try at least to give Australian
courts jurisdiction, even if they have to apply the law of the licensors
nominated country.
WITHHOLDING TAX
This is a subject that deserves a book of its own, so it is not possible to give
a comprehensive treatment of its working. However, licensees who deal with
overseas licensors need to be aware of it and how it can affect their remittances
of advances and royalties to overseas licensors.
Withholding tax is a tax levied on remittances of advances and royalties
to licensors outside Australia. There is a specific department of the Australian
Taxation Office (ATO) that deals with withholding tax. The people there are
helpful and will answer telephone queries and supply the necessary forms
on request. The ATOs website also contains pretty much anything you need
to know.
The practical effect of withholding tax laws is that all licensees have to
deduct a specific percentage of all royalty and advance payments and pay
it to the ATO accompanied by the appropriate form. The percentage varies,
depending upon the country to which the royalties are being paid. It can range
from 5% to 10% (for countries with tax treaties with Australia) up to over 40%
(for non-treaty countries), which is why you have to contact the ATO before
you make the remittance.
The licence agreement should always allow the licensee to deduct
withholding tax before calculating the remittance, otherwise the licensor
could insist that you pay the tax out of your own pocket. For example: if an
advance of $10 000 is agreed, and the withholding tax rate is 10%, then you
will send $9000 to your licensor and $1000 to the ATO. If, however, there is
no clause in the contract allowing withholding tax to be deducted from the
advance, then the licensor could insist you pay $10 000 to it, and you will still
have to pay the $1000 withholding tax. In that event, your total expenditure
has gone up to $11 000 and the extra $1000 will not be recoupable as part of
the advance. The same applies to royalty remittances.
The licensee must obtain a receipt from the ATO, which can take months.
This receipt is then sent to the licensor. As far as the licensor is concerned,
withholding tax is usually treated as a pre-payment of tax in its own country.
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This means the licensor pays $1000 less tax for that year in its own country.
Of course, this only helps a licensor that is actually liable to pay tax in its own
country. If the licensor is making a loss, then the tax paid in Australia cannot
be reclaimed in its own country.
DIGITAL-ONLY DISTRIBUTION
With the advent of legitimate, centralised and easy-to-use pan-global digital
distribution systems like Apples iTunes Store, increasing numbers of catalogue
owners are eschewing local physical distribution deals and instead simply
activate distribution in a particular territory or market with the tap of a key.
Of course, even with digital-only distribution, there is still a place for a local
promotional campaign to make the most of the release. In fact most labels will
combine physical and digital releases of new material in the same strategy.
There is more than one effective and legitimate digital distribution
service, but at the time of writing one could be forgiven for thinking that
theres only one that matters: Apples iTunes Store software-based online music
shop. Within a year of its introduction in the US in 2003, it had sold over 25
million songs. The iTunes Store was a complete game-changer for the music
distribution industry. We didnt get it in Australia until 2005: its launch was a
very significant date for the music industry at last the public had a legal way
to download music.
Like withholding tax, above, the iTunes Store could be the subject of its
own (much more interesting!) book. The iTunes story contains many twists
and turns: battles with the Majors over catalogue, digital rights protection
experiments, sound quality developments and regulatory issues created by its
monopoly position, but this is not the place for the tale.
The basic iTunes Store distribution licence is a non-exclusive master
licence of the digital reproduction and communication rights in the master and
associated artwork, but if the licensor gives another digital distributor more
favourable terms, they are obliged to give iTunes the same deal. Apple re-sells
the tracks to customers with access to the iTunes software application, under
the contractual terms of the customers end-user licence agreement for that
software and the iTunes Stores Terms of Use. The terms include permission to
burn copies of the tracks (subject of course to the provisions of the Copyright
Act), store and use the tracks on several devices at the same time and generally
use the tracks for personal, non-commercial use.
The basic term of the contract is around 3 years, but either party can
pull down the licensed content if they believe they no longer have the right
to authorise its distribution. The iTunes Store must be able to sell each of the
licensed tracks separately, whether the track is released elsewhere as a single
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